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If an applicant notes that they do not have any related living costs (doesn’t pay rent, lives with parents, etc), can a bank arbitrarily (but uniformly when applicable) assess a certain dollar amount related to housing expenses to determine a borrower’s ability to repay a loan? For instance, a borrower comes into apply for a small car loan. The borrower is currently living with their parents and does not have any housing expenses. And let’s say that the borrower has no other credit obligations. Can the bank (as policy) add a determined housing expense when calculating ability to repay even though that expense is not an actual expense?
Even if the bank applies this policy consistently, it does not seem like a good practice to add an expense to the borrower when the expense is not an actual expense. Additionally, I could see potential UDAAP concerns with the policy.
Any help would be appreciated.
I agree with your thoughts about this being a fair lending issue. I assume the concern is that the current arrangement of no expenses may not last forever; however, I don’t think it would be wise to add potential expenses that the borrower is not incurring because it is not an accurate representation of the applicant’s commitments/expenses, you do not when/how much potential future expenses would be, and the process could have fair lending implications. I think this practice could be viewed as intentionally trying to disqualify certain borrowers or it could be viewed as an innocent policy that may have a disparate impact on people of a protected class. Are there certain applicants (minorities, specific religion, or specific age, etc.) who are be more likely to live at home or in a multi-family living arrangement where they might not incur expenses? Could this practice be deemed that you are intentionally/overtly discriminating against these groups? Or if this policy seems like a justifiable business practice on the surface, to protect the bank, could it have a similar disparate impact on a protected class of consumers?
UDAAP is an underlying concern for many things; I think this practice could have potential unfair treatment concerns.
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